Washington crimps Europe’s Iran trade windfall

WASHINGTON — Iran may be open for business following the historic nuclear accord with the West, but for European companies the road to Tehran still leads through Washington.

And this has European leaders grumbling that the U.S. Treasury Department is blocking the way for European firms to renew trading ties with Iran.

The hype about the easing of sanctions on Iran covered up a more nuanced reality. In January, the Obama administration lifted measures focused on the country’s nuclear program, but left in place restrictions designed to punish Iran for its support of Lebanon’s Hezbollah, including most of a wide-ranging embargo on American business with Tehran that’s been in place since 1995. The EU lifted most of the economic and financial curbs that it had first imposed on Tehran in 2008 — sanctions that had slashed EU-Iran trade dramatically.

Two months on, European companies say they are hamstrung by the remaining U.S restrictions. Most notable is a far-reaching 2011 regulation that prohibits banks from processing any Iran-related transactions in the United States, which affects any bank dealing in U.S. dollars. After a decade where several big European banks got burned by billion-dollar fines for sanctions violations in Washington and New York, European financial institutions say they’re not touching Iran. That in turn limits the financing options for European companies looking to trade with Iran.

Treasury said in a statement to POLITICO that it won’t stand in the way of “permitted business” with Iran.

Markus Kerber, the director-general of the Federation of German Industries, Germany’s largest business association, said in an interview that “the banks, at the moment, are not going anywhere near Iran. A sensible bank manager will not even look the country up on the map.”

The divergence on sanctions reflects longstanding tensions between the United States and Europe over Iran, a country long viewed as a vital trading partner in European capitals but as a mortal enemy by many in Washington ever since the Iranian revolution in 1979.

America and Europe agreed to act together to stop Iran from gaining nuclear arms, as last year's deal shows. Washington priorities like crippling Iran’s support for Hezbollah and its hostility toward Israel were left to the side. Facing pressure from Iran critics in both parties, Barack Obama threaded a difficult needle in his opening to Iran, dropping the nuclear-related sanctions in pursuit of a nuclear deal while keeping other sanctions intact.

What’s kosher with Iran?

Even as some European leaders worry that a new U.S. president (if it’s a Republican) could tear the Iran deal to shreds next year, the more pressing concern is to figure out what they can and can’t do now.

In meetings in Washington and European capitals, officials have been trying to secure “assurances” and “clarity” from Treasury officials like Obama sanctions czar Adam Szubin that would offer European banks some peace of mind that they won’t be penalized for financing deals with Iran. European companies won’t know how the U.S. will apply these sanctions until someone gets hits by a fine.

Under Treasury guidelines, the changes in the nuclear-related sanctions mean that foreign subsidiaries of U.S. companies can do business with Iran but only if no U.S. employees are involved — a caveat that can complicate business plans. Untangling European companies from their U.S. parent companies, subsidiaries or business partners is a difficult task. On the U.S. side, only a few categories of business are exempt from sanctions, including aircraft and aircraft part sales (read: Boeing) and Persian rug importers.

Iran business deals could be done through European institutions in euros or pounds, government officials say.

The Treasury said in a statement to POLITICO that it won’t stand in the way of “permitted business” with Iran and recently issued new guidance on dealing with remaining U.S. sanctions, which include restrictions tied to Iran’s support for Hezbollah and human rights abuses. But with a U.S. Congress full of Iran opponents watching the Treasury closely, Szubin is continuing to pledge a hard line.

“These sanctions are still quite extensive,” said one senior European official who has spoken with Szubin.

The acting Treasury undersecretary for terrorism and financial intelligence said in a December speech that his department, for example, will aggressively go after companies with U.S. links that do business with the Iranian Revolutionary Guard Corps, which controls a large majority of the Iranian economy. “Many companies seem at first unaffected but the commercial reality sets in when you look at the companies they control” and related front companies, he said.

While Iranian leaders are announcing multi-billion-dollar deals with the likes of Airbus and Peugeot, some officials remain skeptical of whether some of the billion-dollar announcements that Iran has made in recent weeks will actually come to fruition.

“Which banks [are being used]? I don’t know how [commercial deals with Iran] will work, because of the over-compliance of the banks,” said the senior European official, adding that New York prosecutors are also a threat. “I doubt all these figures, which have been waved by the Iranians in front of the Americans like a red flag.”

Just last week, U.K. Prime Minister David Cameron wrote to Barclays — a global bank wary of triggering U.S. sanctions — asking it to process payments to a British exporter from an Iranian customer. Cameron wrote that Barclays' refusal to do so put it “in opposition to the policy of the U.K. government,” according to an article in the Times.

Iran’s ambassador to Germany, Ali Majedi, said this month that U.S. sanctions keep coming up as a problem when Tehran tries to work with major banks in Europe, according to state-run media.

Navigating the new landscape has been a hot topic among corporate lawyers, business officials and sanctions experts in Europe, who have been listening carefully to conference calls with officials back in Washington on the vagaries of obscure sanctions regulations like the so-called “License H” — and eagerly awaiting clarity from officials at Treasury’s Office of Foreign Assets Control, or OFAC.

Some of the questions that they are asking: How can you structure the foreign subsidiary of a U.S. company so it’s not subject to sanctions? What kind of dollar transactions are allowed?

Iran business deals could be done through European institutions in euros or pounds, government officials say, but the big global banks that many international companies prefer to do business with all do dollar transactions and have operations in the United States, putting them at risk of sanctions violations.

“The dollar clearing issue is still a difficult issue,” said Peter Wittig, the German ambassador to the United States, noting that Treasury officials would be visiting Berlin in the coming days to discuss it. “European banks fear stepping into a kind of gray zone.”

No ‘windfall’

Iran was a huge, $42 billion (€38 billion) trading partner for the European Union prior to the imposition of tough international sanctions in 2008. The U.S. trading relationship with Iran has been miniscule since ties were severed following the 1979 revolution. In 2007, right before major sanctions hit, two-way U.S.-Iranian trade amounted to only $318 million. It dropped to $186.5 million in 2014 before rising to nearly $300 million last year.

“The sanctions have hurt the Europeans, not the Americans, because the Americans didn’t have any diplomatic relationship with Iran since 1979,” said the European official.

Over the last decade, New York prosecutors have been key players in a string of high-profile Iran-related sanctions settlements in the financial sector.

Germany’s Wittig noted that “we don’t see [trade with Iran] as something in principle that is nefarious or illegal. We think it’s something positive.”

The end of sanctions was designed to give Iran a financial incentive to keep its nuclear program shuttered.

But “it has not been the windfall to Iran that some people expected,” said Elizabeth Rosenberg, a former Treasury advisor who is now a senior fellow at the Center for a New American Security, a Washington think tank. “It’s exactly what we thought would happen. Lots of talk, but not so many deals.”

New York, New York

There’s another worrisome message coming out of Treasury, says the European official: “Beyond the doctrine of the administration, we can’t be assured that the District Attorney of New York will have the same interpretation of the U.S.sanctions.”

That’s no idle threat. Just as OFAC has a long reach, thanks in part to the ubiquity of the U.S. financial system, the state government of New York has unusual leverage as well. For any international financial institution, even on deals that have nothing to do with its U.S. operations, it’s more likely than not that assets will flow through its New York headquarters.

Over the last decade, New York prosecutors have been key players in a string of high-profile Iran-related sanctions settlements in the financial sector. Many of the banks were not based in the United States, but they did their business in U.S. dollars, with branches in Manhattan, and as a result fell under the purview of not just the Justice Department but also New York authorities.

In Washington, Treasury’s Szubin not only faces pressure from a Republican-led Congress but also from members of President Obama’s own Democratic party

In coordination with Preet Bharara, the U.S. Attorney for the Southern District of New York, the Manhattan District Attorney’s office and the New York State Department of Financial Services (DFS) pulled in huge amounts of cash in sanctions-related settlements. The DFS doesn’t pursue criminal investigations or indict people, but it has one weapon in its arsenal that’s universally feared: the ability to take away a bank’s license to do business in New York’s five boroughs.

It used that threat to great effect in 2014 when BNP Paribas settled a sanctions case with the U.S. federal government and New York, paying out a massive $8.9 billion and admitting to flouting U.S. laws for nearly a decade. In that deal, $2.2 billion went to DFS; some employees lost their jobs and BNP lost its ability to clear dollar transactions for a year, meaning that the bank was not allowed to convert payments from foreign currencies into U.S. dollars for clients, though in the end it avoided the catastrophic outcome of having DFS revoke its license.

The BNP case was the largest and probably the most publicized, but the DFS, along with local and federal authorities, has gone after other banks for doing business with Iran and other sanctioned states. In 2015 alone, Crédit Agricole, Commerzbank, and Deutsche Bank paid out more than $2 billion in sanctions fines — not all of which were connected to Iran.

In the most recent fiscal year, DFS received $650 million in settlements. The agency has brought in so much money that the state of New York even achieved a budgetary surplus — a political boon for state leaders. In the case of BNP Paribas, Crédit Agricole and Commerzbank, DFS pursued charges based on fraud, lackluster compliance and illicit practices. DFS' entry point into many of the cases was that the institutions had falsified banking records on a massive scale.

Germany’s Wittig said the landscape of state and federal regulators can be “confusing” for European companies. Other European officials are more blunt, and say their financial institutions feel singled out, the victim of political grandstanding. The aggressive DFS tack was not based on some “animus towards European banks,” said the former DFS official. “These were super egregious cases, and this was very serious misconduct.”

Iran skeptics in Congress

In Washington, Treasury’s Szubin not only faces pressure from a Republican-led Congress but also from members of President Obama’s own Democratic party, who would love to impose new sanctions on Iran, particularly in the wake of its tests of ballistic missiles last week.

In a congressional hearing last month, members of both parties pressured an OFAC official to ensure that international financing for Iran’s Mahani Airlines is choked off. “What I don’t see is the pushback” against banks purportedly funding the airline, said Ed Royce, chairman of the House Foreign Affairs Committee.

The saber-rattling in Washington has European business and political leaders concerned about a return to more stringent sanctions. Amid a particularly chaotic U.S. political season, business leaders in the United States and Europe worry that a Republican president would quickly undo the Iran deal. Of the remaining Republican contenders, Senator Ted Cruz has promised to do just that, while businessman Donald Trump and Ohio Governor John Kasich have been more circumspect.

Diplomats and business officials like Kerber don’t expect many major Iran deals to truly be finalized until after the U.S. presidential election. “Every sensible businessman in Germany or in Europe knows … that you will not rush into the Iranian market without looking westward,” he said.